Adequacy analysis of the basic old-age pension system based on local administrative data in China

Abstract

There is no consensus on the judgment of the adequacy status of the old-age pension benefit in China at present. Therefore, clarification of various types of indicators and benchmarks of pension adequacy is urgently needed. According to the theoretical development of pension adequacy, this paper offers a comprehensive analysis of the benefit level of basic pension from the perspectives of poverty alleviation, income substitution, and financial sustainability. The calculation results based on local administrative data show that the current pension benefit in urban China is unbalanced: on the one hand, the average pension level of self and flexible employees cannot keep track of the local average consumption level or even the relative poverty standard in particular years and the individual replacement rates for a few nonstandard employees are less than the minimum standard of 40% set by the International Labor Organization, which means the pension benefit performs poorly in terms of consumption smoothing. On the other hand, the lifelong pension rights are much higher than the lifelong contribution obligations for new retirees. Under the trend of population ageing, the extremely high benefit-cost ratio means that the current retired generation is eroding the welfare of the current working generations, and the long-term financial sustainability of the pension system is facing challenges. In the future, in order to improve the benefit level of the basic old-age pension system in a sustainable way, we need to increase the average and individual replacement rates and reduce the benefit-cost ratio by consolidating contribution bases and delaying the number of contribution years.